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If you just joined as a new member of the board of directors of a startup, or you are VC that hops from board to board you should know your legal duties as a director. We usually try not bore you with arcane legal concepts from the common law and Delaware corporate law, but you must familiarize yourself with the term fiduciary and fiduciary duties.

Fiduciary duties

Under Delaware law each director is a fiduciary and has fiduciary duties to shareholders and the company. In practice this means that as fiduciary, a director must not put his personal interest before the interest of the company and the shareholders. In the real world you only care about your own wealth maximization, however, when you become a director you have to think about the company and wealth maximization for all shareholders (not only preferred shareholders or only founders). For example, if a director puts his own personal interest ahead of the shareholders or acts negligently he can be found personally liable under Delaware law.

Duty of Care

Directors in Delaware are bound by the duty of care and duty of loyalty, which supplements specific responsibilities spelled out in the organizational documents of the company (articles of incorporation and bylaws) and shareholder agreements (voting agreements). The duty of care is legal code word for “you can do that and can’t do that” and gives the board of directors’ guidelines on how to act. The standard for duty of care requires that all corporate duties must be discharged in good faith and with a degree of diligence, care and skill that an ordinarily prudent director would exercise under similar circumstances in like position. For example, if a director of company fails to attend any of the board of directors’ meetings or to keep abreast of the business corporation under certain circumstance (loss to the corporation) may be found liable for nonfeasence (not acting when there was a duty to act). Directors can be held liable also for misfeasance (improper actions). The concept of duty of care forces you to make informed business decisions as a member of the board. That is why all board decisions are accompanied by investigations with the help of outside professionals, like lawyers or accountants.

Duty of Loyalty

Stay focused what follows is also important about the duty of loyalty. When you are on the board of directors you can’t sleep around with other startups, kiss other companies (yes, we know you liked it) and ask people to call you maybe. In other words you have to be loyal to the company and its shareholders. The company stays first before anything else. The standard for duty of loyalty requires that all corporate decisions must be undertaken in good faith, consciousness, fairness, morality and honesty required by Delaware law (if you are incorporated in Delaware a as many US companies are). This is especially tricky for founder directors that receive stock grants or some other perks from the company to keep them motivated.

In general the founders as directors and recipients of goodies should not be on both sides of the transaction. Another problem area are VC director who technically represent investors, but nonetheless have to act in interest of the company. VC directors once they join the board of a startup must think in terms of wealth creation for the company not only their parochial interest as preferred stockholders.

Cytowski & Partners

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Law firm specializing in startups, series A and US expansion. No legal advice I No attorney client relationship I Attorney advertising

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